Canadian corporations are coming under increasing pressure to disclose their climate-related business risks as part of a global effort to reorient the financial sector to support the transition to a net-zero economy.
Provincial securities commissions are considering a proposal from the Canadian Securities Administrator, however, that falls short of the mandatory-disclosure framework sought by the federal government.
The apparent shortfall in provincial ambition could leave Canadian companies behind in the pursuit of international capital to finance emission reductions and transformative business strategies. And it would force Finance Minister Chrystia Freeland to step into the breach.
While securities regulation falls under provincial jurisdiction, the federal government has tools to encourage regulators if they fall short. Ottawa might have to set a higher bar than provinces are willing to accept, and force federally regulated financial institutions — and, by extension, their corporate customers — to meet it.
In the mandate letter she received from the prime minister in December, Freeland was charged with working with provinces and territories to adopt mandatory climate-related disclosures based on best international practices. Ottawa’s newly formed Sustainable Finance Action Council is working on that and other banking matters.
In October, the Canadian Securities Administrators (CSA) — which represent provincial commissions — released proposed rules for climate risk that would allow companies to opt out of such disclosure entirely, or at least significantly limit the scope of their assessment and reporting.
The CSA and provincial securities commissions are now holding consultations, and must decide in the coming weeks whether to agree to the proposed rules, and how extensive the reporting obligations will be.
While the CSA warn of an onerous regulatory burden if companies face mandatory reporting on the full scope of emissions, failure to meet international standards would come at a cost, two leading financial experts warned last month in a Globe and Mail opinion piece. “Strong and credible disclosure reporting is essential” for Canadian firms to compete for capital, wrote Sean Cleary and Jim Leech, who are, respectively, chair of the Sustainable Finance Institute at Queen’s University and chair of its advisory committee.
The stakes are enormous for the Canadian economy, especially oil and gas producers whose business plans are most vulnerable to climate-related risks, including the widespread adoption of low-carbon technologies, such as electric vehicles (EVs) and new regulations to reduce emissions.
The federal government has promised to release an updated plan to reduce emissions by the end of March, in order to incorporate Liberal promises such as EV mandates, emissions reductions in the oil industry, and a net-zero grid by 2035. Implementing sustainable finance reforms should be a major part of that effort.
Full climate-related disclosure sends clear signals to lenders and investors of the relative risks and expected returns from investments in fossil-fuel companies, and between those firms and companies offering low-carbon alternatives.
It also forces corporate executives to fully analyze their own organizations’ risks and opportunities, which will arise as a result of climate change and the global effort to avert the worst impacts of a warming planet.
International standards call for disclosure of the full range of emissions that result from a company’s operations. For an oil company, for example, they include: Scope 1 emissions from its production facilities; Scope 2 emissions from the energy it uses to produce the crude, and Scope 3 emissions when customers burn the fuel in a vehicle or industrial plant.
The CSAs’ proposed rule presented two options: a framework for reporting the full gamut of emissions with an opt-out for companies that explain why they’re not doing so, and mandatory reporting of Scope 1 emissions with an opt-out for Scopes 2 and 3. The CSA rule wouldn’t require companies to stress-test their business plans against scenarios in which the world would succeed in hitting a 2 C target, despite broad international support for such a measure.
The absence of scenario planning or Scope 3 disclosure would result in companies telling half the story of their climate-related risks.
Oil companies that succeed in reducing emissions at their operations while increasing crude production are still putting more carbon into the economy, and, eventually, into the atmosphere. Roughly 80 per cent of greenhouse gases (GHGs) associated with a barrel of crude occurs are emitted when it’s used, and are therefore considered Scope 3.
Consideration of the full scope of emissions matters when, for example, the federal government has to decide whether to give tax breaks for corporate investments that result in lower emissions at the production stage, but more oil production, and, therefore, more GHGs overall.
Such data are also needed by investors and banks who are committed to reducing the carbon intensity of their assets under management or loan portfolios.
There’s no question that mandatory disclosure and scenario planning will be a burden to companies. There are big gaps in data that have to be filled, and federal and provincial governments will have to work with industry to make the analysis and reporting as efficient as possible.
Freeland needs to move quickly to indicate Ottawa’s intention to embrace robust and mandatory reporting, even in the absence of such action by provincial securities commissions.
In her mandate letter, the minister is instructed to require that federally regulated financial institutions, pension funds, and government agencies issue climate-related financial disclosures and net-zero plans. Those rules should include Scope 3 reporting and scenario analysis.
To meet such requirements, banks and pension funds would have to demand the full scope of disclosure from their customers and the companies in which they invest. Similarly, mandatory disclosure for federal agencies such as the Business Development Bank of Canada and Export Development Canada will flow through to their customers.
In an ideal world, the provincial securities regulators will listen to experts such as the Sustainable Finance Institute’s Cleary and Leech, who advocate for more robust disclosure, and will strengthen the proposed regulations.
In a world desperately in need of an aggressive response to accelerating warming and its impacts, climate finance must become “business as usual,” and full disclosure is a big step in that direction.
Shawn McCarthy writes about energy and climate change and is senior counsel at Sussex Strategy Group. He’s also vice-president of the Canadian Committee for World Press Freedom.
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